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Out of the shadows – new opportunities for Guernsey’s funds sector

12 | December 2014
Winston Churchill’s quote of
‘Never let a good crisis go to
waste’ has been very appropriate
as we struggle to restore stability and
prosperity to our banking and financial
services industries.
Politicians and economists have bemoaned
the lack of credit following the banking
crisis, the impact this is having on households and industry,
and how it is acting as a serious brake on economic activity.
However, as the supply of bank credit ebbs, human ingenuity
searches for alternatives and so we have seen the phenomenal
growth in ‘shadow banking’.
Shadow banking has emerged as a generic term for many
quite different alternative forms of financing. The funds
industry is increasingly serving as a direct conduit between
institutions and investors holding cash, and property
investors requiring development finance or the refinancing
of existing loans. Commercial property loans, office
developments and social housing development financing
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Out of the
shadows
Robin Fuller, chairman of the marketing
committee of the Guernsey Investment Fund
Association, looks at new opportunities for
the Guernsey funds sector and highlights
fintech as one likely to be significant
December 2014 | 13
BUSINESS BRIEF | JON MOULTON AND THE CISE
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Alongside property debt investment, Guernsey’s funds
industry has seen growth in various types of debt
fund – bank loan book refinancing, factoring and
trade financing to name but a few. Guernsey continues
to be the domicile of choice outside of the UK for
closed-ended London Stock Exchange-listed funds, and
Guernsey’s open-ended B scheme environment offers all
the flexibility required for open-ended funds investing
in debt.
Just as funds are an important part of the new loans
landscape, helping to fill the gap left by the banks
reducing their loan books, so crowdfunding and P2P
lending are developing to meet the demand from
households and businesses for loans, and also for
equity investment into smaller companies and startups.
Crowdfunding has its origins in charitable giving
and community funding and as such is unregulated.
However as the funding model develops from one
in which individuals make charitable donations or
sponsor someone or an organisation for either no
return or in return for a service, to one in which
investors make equity investment into start-up and
smaller companies so the business model migrates
from the unregulated to the regulated financial services
industry.
The crowdfunding model encompasses three quite
distinct activities – origination, the sourcing of debt
from borrowers, platform, the web-based transaction
platform matching borrowers with lenders, and
funding, the provision of capital by lenders.
The making of loans, running trading platforms
and the administration of making investments is
not regulated activity in Guernsey. This means
crowdfunding models which provide no investment
advice or which make no offers via investment
promotions or a prospectus or an investment scheme
(I am not going to attempt to define a fund here) are
not conducting a regulated activity and fall within
the Guernsey definition of a non-regulated financial
services business. The Registration of Non-Regulated
Financial Services Businesses (Bailiwick of Guernsey)
Law, 2008 requires businesses to register with the
Guernsey Financial Services Commission, but has
no effect on the conduct of business, except for the
carrying out of AML/CFT measures.
However, while the crowdfunding platform is a
relatively simple business model and is registered but
unregulated, P2P lending increasingly incorporates
regulated business as it includes investment in equities
or some sort of securities offering.
Guernsey’s existing funds regime can be used for P2P
business. While lending itself is unregulated, investors
are increasingly buying shares in a closed-ended
investment company or in securities issued by a CEIC.
The CEIC can be listed on an exchange, as can any
debt instruments issued by either a CEIC or an openended
investment company. Guernsey is the most
popular domicile for London-listed CEIC’s outside of
the UK, and the Channel Island Securities Exchange is
a very popular and recognised exchange on which to
list debt instruments.
P2P business is providing capital to SME’s,
infrastructure companies and businesses seeking
longer-term funding. Lenders are most frequently
institutions, pension funds and wealth managers.
Offering illiquid loans through a CEIC with a
market listing brings the benefits of adherence to
market listing requirements, secondary market
liquidity and corporate governance. OEICs and
CEICs authorised in Guernsey can lend direct to
borrowers under Guernsey’s existing regulations. The
choice of Guernsey as a domicile also enables fintech
entrepreneurs to use the tried and tested PCC and
ICC fund structure – structures that have proved very
popular with Guernsey’s hedge fund and insurance
company managers.
So with a mobile industry such as fintech, why
use Guernsey as a domicile for the business or the
investment securities being offered?
Fintech is a new, fast-developing industry with all the
potential risks and rewards that tech businesses can
bring. Investors will want the comfort of not adding
jurisdiction, legal and operational risk into the mix.
Guernsey continues to offer a stable environment to
alternative investment fund managers, fiduciary and
insurance managers. It has the legal, regulatory and
administrative expertise and resource to offer fintech
entrepreneurs a domicile from which to grow and
prosper.

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